Crude Oil Price Shocks and Industrial Returns in Pakistan: An Examination through GARCH Based Dynamic Models

Abstract

This paper attempts to examine the link between crude oil prices and industrial returns in Pakistan using daily data for the period of June-2008 to Jan-2021. Mean and volatility spillover is examined by using ARMA (1,1) GARCH (1,1)-M model. In addition, the timevarying nature of conditional correlation is determined by using DCC-GARCH models. Further, study has also investigated the impact of Covid-19 on the relationship between COP and INDR. Findings of the study provide strong evidence of volatility spillover from crude oil prices to Automobile Assemblers, Oil & Gas, Power Generation & Distribution and Refinery but only scarce evidence is found regarding mean spillover. DCC-GARCH model reveals the time-varying nature of conditional correlation between crude oil prices and all other industries. Moreover, the results also provide some evidence about asymmetric behavior in correlation among crude oil prices to Cement and Refinery.